Biased Beliefs, Asset Prices, and Investment: A Structural Approach
Preprint
- 1 January 2012
- preprint
- Published by Elsevier BV in SSRN Electronic Journal
Abstract
We structurally estimate a model in which agents' information processing biases can cause predictability in firms’ asset returns and investment inefficiencies. We generalize the neoclassical investment model by allowing for two biases -- overconfidence and over-extrapolation of trends -- that distort agents' expectations of firm productivity. Our model’s predictions closely match empirical data on asset pricing and firm behavior. The estimated bias parameters are well-identified and exhibit plausible magnitudes. Alternative models without either bias or with efficient investment fail to match observed return predictability and firm behavior. These results suggest that biases affect firm behavior, which in turn affects return anomalies.This publication has 48 references indexed in Scilit:
- Managerial MiscalibrationPublished by National Bureau of Economic Research ,2010
- Stocks as Lotteries: The Implications of Probability Weighting for Security PricesAmerican Economic Review, 2008
- Consumption, Dividends, and the Cross Section of Equity ReturnsThe Journal of Finance, 2005
- When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent FirmsPublished by National Bureau of Economic Research ,2002
- Mental Accounting, Loss Aversion, and Individual Stock ReturnsThe Journal of Finance, 2001
- Boys will be Boys: Gender, Overconfidence, and Common Stock InvestmentThe Quarterly Journal of Economics, 2001
- Prospect Theory and Asset PricesThe Quarterly Journal of Economics, 2001
- A Model of Investor SentimentPublished by National Bureau of Economic Research ,1997
- A progress report on the training of probability assessorsPublished by Cambridge University Press (CUP) ,1982
- The relationship between return and market value of common stocksJournal of Financial Economics, 1981